Sanae Takaichi’s Mandate to Revitalize Japan’s Economy

China appears unenthusiastic about Sanae Takaichi, Japan’s recently appointed prime minister. Reports indicate that thousands of Chinese tourists are rethinking their travel plans to Japan following her statements linking a potential crisis in the Taiwan Strait directly to Japan’s national security concerns.

However, this perspective is not widely shared elsewhere in Asia, where many view a more robust Japan as beneficial for the region’s overall stability and progress.

Within Japan itself, Takaichi enjoys remarkable popularity among the populace.

Her commanding supermajority in parliament theoretically empowers her to pursue virtually any agenda she desires, bolstered by the wide-ranging support she commands across various demographics.

Some observers suggest her victory stems from a right-leaning shift among Japan’s aging demographic. This notion does not hold up under scrutiny. While she garners substantial backing from those over 50, exit polling data reveals equally strong enthusiasm from voters under 30. Clearly, she possesses a solid mandate from the electorate.

The question now is how she intends to leverage this mandate. Early indicators are promising, particularly judging by the significant influx of capital into Tokyo’s stock market.

For those familiar with our long-term outlook, our optimism regarding Japan has persisted for more than a decade.

That said, this view has now become mainstream, with widespread consensus building around heavy exposure to Japanese assets.

The Nikkei index has climbed 9% year-to-date and rocketed to fresh all-time highs in the immediate aftermath of Takaichi’s electoral triumph.

Much of this market enthusiasm revolves around the prospect of enhanced political stability. Few democratic leaders today can claim such a decisive mandate paired with a well-defined policy platform. Beyond stability, the specifics of her agenda are fueling investor excitement.

Japan’s persistent economic challenge over the past two decades has been insufficient investment, contributing to stagnant growth and a shrinking capital stock.

This context explains Takaichi’s 2026 budget proposal, which includes a 6.2% increase in spending, complemented by a substantial $135 billion stimulus package approved last November and now set for implementation.

This fiscal expansion is strategically linked to a comprehensive industrial strategy aimed at channeling investments into critical areas such as artificial intelligence, semiconductors, quantum computing, defense, and shipbuilding.

These sectors are poised to benefit from strong governmental tailwinds, paving the way for sustained economic growth and moderate inflation, even in the absence of a rebound in Chinese tourism.

Two Challenges for Japan’s Economy That Aren’t as Dire as They Seem

Conventional wisdom highlights two major obstacles to Japan’s economic prospects: its enormous public debt burden and a shrinking population.

The debt issue, in particular, is often exaggerated.

Public debt stands at approximately 230% of GDP. Yet this figure tells only part of the story. When considering the Japanese government’s broader financial assets, valued at around 140% of GDP, the net position improves dramatically—placing Japan in a more favorable light than even the United Kingdom. Notably, this calculation excludes the Bank of Japan’s substantial holdings, which encompass roughly half of all outstanding Japanese government bonds.

These assets include significant domestic equity stakes, cash deposits, and foreign exchange reserves managed by the Ministry of Finance.

According to analysis from Gavekal Research, a closer examination of these balances reveals a manageable situation overall.

The government’s annual interest payments on its debt amount to about 1.5% of GDP, translating to an effective rate of roughly 0.7%. Factoring in earnings from U.S. foreign exchange reserves (around 30% of GDP yielding the Federal Reserve’s 3.5% rate) and the remainder at the Bank of Japan’s policy rate of 0.75%, total income streams approximate 2.5% of GDP.

Viewed through this lens, Japan maintains considerable fiscal flexibility to handle elevated debt-servicing expenses using existing resources alone. For now, the bond market may have little cause for alarm—though sustained sharp rises in interest rates could alter that dynamic.

The demographic headwind is similarly less daunting than commonly portrayed. Japan’s total population has been declining for years, with the working-age cohort following suit in recent times. Fortunately, this trend aligns with rapid advancements in labor-substituting technologies like AI and automation.

Japan presents vast opportunities for automation adoption.

A simple illustration: even in the heart of central Tokyo, not every convenience store yet features self-checkout systems.

On a grander scale, manufacturing stands ready for full automation. Fanuc, a leading industrial robotics firm, already operates ‘dark factories’ capable of running continuously for 30 days without any human intervention—earning the name because robots require no lighting for nighttime operations. We can anticipate a proliferation of such facilities in the coming years.

Meanwhile, voting patterns in Takaichi’s election underscore that younger generations are content with the status quo. They have limited recollection of the prolonged deflationary period and inhabit a society where they stand to inherit multiple properties, enjoy rapidly rising wages and disposable incomes (with one prominent Tokyo firm recently boosting starting salaries for new graduates by 30%), and benefit from a culture of respect and accommodation. In a landscape of labor scarcity, this positions the youth advantageously.

The recent surge in Japanese equities implies that much of this positive momentum is already reflected in valuations. Nevertheless, with ongoing capital rotations away from U.S. markets, it remains plausible for technology, industrial, and defense-related stocks to sustain their upward trajectory.

Furthermore, as Japan’s benchmark indices reach record peaks amid post-election optimism, there is a strong likelihood that domestic institutional investors will finally shift allocations from fixed income into equities, according to Chris Wood of Jefferies. Such a reallocation could trigger a market re-rating through multiple expansion, driving further gains.